What is a reserve study?
The document that tells your board what to save for, and how much.
A reserve study is a two-part analysis of the major components an association is responsible for repairing or replacing. A physical inspection inventories those components and estimates their remaining life, and a financial analysis compares the reserve fund's current balance to what it should hold and recommends a funding plan.
Two analyses, one document
A reserve study bundles two different jobs into a single report. The physical analysis is the inspection side. It builds the component inventory, that is, the list of roofs, pavement, pool equipment, and other shared assets, and estimates how much life each one has left.
"The component inventory, condition assessment, and life and valuation estimates."
Source: What's Included in a Reserve Study? Key Elements Explained, Reserve Advisors
The financial analysis is the numbers side. It states where the reserve fund stands today and lays out a recommended contribution schedule going forward, built on stated interest and inflation assumptions. Neither half works alone: the physical count tells the preparer what needs money and when, and the financial analysis turns that into a figure the board can put in the budget.
What the study is actually for
The point of a reserve study is to let an association pay for its big, infrequent projects out of savings it has already collected, rather than scrambling when the roof or the pool pump finally gives out.
"Without reliance on additional supplemental funding sources."
Source: National Reserve Study Standards (overview), Community Associations Institute
In practice the end product is a schedule: for each major component, when it will need replacing, roughly what that will cost, and how much the association should be setting aside now to be ready. How often a study is required, and by whom, varies by state and sometimes by your association's own budget size. Check your state's condominium or common-interest statute and your governing documents.
A recommendation, not a mandate
The study's contribution number is professional advice, not a rule the board must obey. What actually binds the board is its own governing documents, any applicable state statute, and its fiduciary duty of care. A board that follows its study and documents its reasoning is in a much stronger legal position than one that guesses, and a board that funds below its own study's recommendation without writing down why takes on real risk.
"Could very well face a future legal challenge to that decision."
Source: Is Reserve Funding Mandatory?, Berding Weil
That protection has a name: the business judgment rule. It shields a decision made in good faith by a board that was informed and acted in what it reasonably believed was the association's interest, but only if the board can show it actually followed an informed process.
Check yourself
Answer before you read the explanation, recalling it is what makes it stick.
A preparer walks the property counting roofs, pool equipment, and paint cycles due for renewal. Which half of the reserve study is this?
The board contributes less than its reserve study recommends and never explains why in the minutes. What does this put at risk?
A homeowner asks why the study recommends raising contributions by a set amount each year. Which two things combined to produce that number?
Sources
- National Reserve Study Standards (overview), Community Associations Institute
- What's Included in a Reserve Study? Key Elements Explained, Reserve Advisors
- Is Reserve Funding Mandatory?, Berding Weil
- Fiduciary Duties 101, Limiting the Liability of the Board, communityassociations.law
Related elsewhere in the Academy
Reserves
Next up: how the physical inspection behind this study actually works, component by component.
Whether your association is legally required to get a reserve study, how often, and who is allowed to perform it vary by state, and sometimes depend on your association's budget size or building height. Check your state's statute and your own governing documents.